IF YOU ARE NOT AN S CORPORATION, READING THIS ARTICLE COULD SAVE YOU A TAX FORTUNE
Tax planning is not like a burning building. It's rarely an emergency. But the subject of this article -- should you be a non-tax-paying S corporation or a tax-paying C corporation? -- is a real emergency. If you don't make the right tax moves -- quickly -- you are probably going to burn a lot of your dollars paying extra taxes. Here's the story and how to put the fire out! Generally, the conversion of a C corporation to an S corporation is tax-free for both the corporation and its shareholders. Good deal! Also, an S corporation carries with it other tax goodies: avoids double taxation, eliminates unreasonable compensation and unreasonable surplus problems, an easy way to divide income with low-bracket family members, allows an almost tax-free transfer of your business using a grantor retained annuity trust and the list could go on and on. Yes, there are some minor disadvantages. But this article is not about the advantages and disadvantages of operating as an S corporation. Listen to this: Under the Clinton administration budget plan, an election by a C corporation to become an S corporation would be treated as a taxable liquidation of the C corporation. Result: Two immediate taxes -- (1) on the corporation (based on the fair market value of the corporation over its book value, just as if the corporation had sold its assets) and (2) on you and all your fellow shareholders (just as if you sold your stock for its fair market value to a stranger). Simply put, the IRS wants to close the door on the tax goodies you enjoy as an S corporation. The tax-expensive crackdown would apply to S elections that take effect in a tax year beginning after January 1, 1999. "Large C Corporations" could elect S corporation status tax-free for taxable years beginning in 1998 or on January 1, 1999. For this purpose, a large C corporation is one with a "value" of more than $5 million at the time of conversion. Value means the fair market value of all the stock of the corporation on the date of conversion. Do not pass go. Do not collect $200. Go straight to your professional if you are a large C corporation or may become one soon. Unless your professional can give you solid tax-saving reasons (some corporations -- very few -- should remain C corporations) for the long-term (including when you might want to sell your business or transfer it to your kids), elect S corporation status. Now! This decision could be one of the most important tax decisions in your business life. If you need help making your decision, read the companion Special Reports written especially for readers of this column titled: (1) A Tax Superstar...S Corporation; (2) How to Value Your Business..AND WIN THE TAX GAME; and (3) Your Business ...America's Best TAX SHELTER -- $27 each; $45 for any two; or $59 for all three. Write to Book Division, Blackman Kallick Bartelstein, LLP, 300 South Riverside Plaza, Chicago, IL 60606. Irv Blackman and Brian Whitlock are CPAs with Blackman Kallick Bartelstein, LLP in Chicago. Also lawyers, they specialize in business succession and wealth transfer and are sought-after speakers. Want to consult? Need a second opinion?...Call Irv or Brian, 312-207-1040.